Earnings Outlook in U.S. Dims as Global Economy Slows

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The New York Times
Monday, September 17, 2012

Earnings Outlook in U.S. Dims as Global Economy Slows

By NELSON D. SCHWARTZ

The boom in American corporate profits, which has far outpaced the gains in the broader economy since the end of the last recession, is faltering.

Giants like FedEx and Intel, two bellwethers of the global economy, are warning of lower quarterly profits because of weakness in worldwide demand. Overseas companies are feeling the pinch, too. Burberry, the British luxury retailer which had seemed immune to a slowdown, is offering a similar warning.

Even smaller, family-owned companies like Eastman Machine in Buffalo, which makes cutting equipment for the textile industry, are wary. “We feel like we are walking on a tightrope,” said Robert Stevenson, Eastman Machine’s chief executive.

In all, Wall Street expects quarterly profits at the typical large American company to decline for the first time since 2009.

The causes of the expected decline are many. In addition to the anemic economy in the United States, much of Europe has fallen into recession while growth in China, once white-hot, has slowed. There is also the looming prospect of automatic tax increases and spending cuts in Washington, which has caused companies to sit on the sidelines.

After reducing spending and eliminating jobs during the recession, American companies reaped huge gains by keeping expenses down and putting off aggressively hiring new workers as growth slowly returned. Strong profits have also propelled the stock market higher, reassuring investors whose other assets, like real estate, have declined in value over the same period.

But while the Standard & Poor’s 500-stock index on Friday reached its highest close since 2007 — after the Federal Reserve’s announcement of its latest stimulus effort — the cycle of steady earnings increases appears to have run its course.

“A lot of the profit gain you had in the last few years was a bounce from the recession and a result of very aggressive cost-cutting,” said Ethan Harris, chief United States economist at Bank of America Merrill Lynch. “Those factors are going to be very hard to replicate.”

The expected decline in profits has yet to set off big layoffs. But it is another factor that is inhibiting hiring and keeping unemployment above the politically important level of 8 percent, executives and economists say.

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